News Update Corporate M&A

17 december 2020

The Bill on the Management and Supervision of Legal Entities (the “Bill”) will enter into force on 1 July 2021. The Bill will change the rules for foundations, associations (including mutual benefit associations) and cooperatives.

The Bill was submitted in 2016 following management and supervision incidents at foundations in the semi-public sector (such as government-funded healthcare institutions, housing corporations and educational establishments). According to Minister Dekker, the Minister of Justice and Security, the Bill is needed to professionalise management and internal supervision. It will also clarify the exact duties and responsibilities of directors and internal supervisors and the extent of their liability.

WHICH TOPICS ARE COVERED BY THE BILL?

Four main themes run through the Bill:

• Rules governing how supervisory boards and ‘one-tier boards’ (made up of executive and non-executive directors) are established and how they perform their duties. The Bill offers a choice between a one-tier or two-tier board for foundations, associations and cooperatives.
• Rules specifying when management and supervisory board members have a conflict of interest and must refrain from making decisions. As a result, the current conflict of interest rules that interfere with representative authority will cease to apply.
• Rules governing the liability of management and supervisory board members for foundations, associations or cooperatives who fail to properly perform their duties.
• Greater judicial discretion to dismiss a foundation's management or supervisory board member at the request of the Public Prosecution Service or another interested party.

WHAT ARE THE LIABILITY RISKS FOR MANAGEMENT AND SUPERVISORY BOARD MEMBERS OF FOUNDATIONS, ASSOCIATIONS AND COOPERATIVES?

Under both the current law and the Bill, directors of all types of legal entities, including foundations, associations and cooperatives, must properly perform their fiduciary duties. If they fail to do so, they may be sued, for example by the board that succeeds them. The current law does not regulate the proper performance of duties by supervisory directors of foundations, associations or cooperatives, although supervisory board members have been found internally liable due to improper supervision in past case law.

The current law contains a separate article for bankruptcy situations. A bankruptcy trustee can only sue the management and supervisory board members of a cooperative or a commercial foundation or association (subject to corporation tax) for improperly performing their duties. The current law has an evidentiary presumption in this respect: for example, if the management board files the annual financial statements late, it has failed to perform its duties properly. This is then presumed to be a significant cause of the bankruptcy.

The Bill provides that management and supervisory board members of all foundations, associations and cooperatives can be held liable for improperly performing their duties both in and outside bankruptcy. Compared to the current law, this mainly means an extra risk for management and supervisory board members of non-commercial foundations and associations in bankruptcy situations. The legislator has somewhat mitigated this risk because this evidentiary presumption will not apply to these board members. However, the evidentiary presumptions will apply to board members of commercial foundations and associations, cooperatives and semi-public institutions.

IS IT NECESSARY TO AMEND THE ARTICLES OF AN EXISTING FOUNDATION, ASSOCIATION OR COOPERATIVE?

Once the Bill has entered into force, the articles of an existing foundation, association or cooperative must be amended in at least these two cases:

• If the articles do not yet contain any rules on how duties and powers are to be exercised if all management board and/or all supervisory board members are absent (e.g. due to resignation or dismissal) or incapable of acting (e.g. due to long-term illness or suspension).
• If the articles contain an arrangement under which a management and/or supervisory board member designated by name or in office may cast more votes than the other management and/or supervisory board members combined (for example, in the case of a two-member board, one director may cast two votes and the other director may cast one vote).

These amendments do not have to be done immediately; this can instead be done when the articles are next amended.

The articles may also be amended in these cases:

• If there is a conflict of interest rule that deviates from the statutory text, this does not need to be amended immediately. However, the rule in the articles cannot be invoked once the Bill enters into force. For this reason, an amendment is advisable, but not required.
• A structure with a general and day-to-day management board does not need to be adapted immediately. Even so, it is important to determine whether this qualifies as a one-tier board or whether the general management board is in fact a supervisory board. In those cases, it may be advisable to clarify and adapt this.